C&C Group plc (CCR) Earnings Call Transcript

Good morning, ladies and gentlemen, and welcome to the C&C Group Half Year 2023 Results Presentation. My name is David Forde. I'm the CEO, and I'm joined this morning by Patty McMahon, our CFO. And between us, we will take you through the presentation in about the next 25 minutes and hopefully leave sufficient time for questions and answers at the end of the session. If you have the deck in front of you, I will refer you to Slide 2, to our disclaimer. And then I will quickly move on to Slide 3 to talk about progressing our strategy and what we're going to take you through today. After myself, Patty is going to take you through our financial highlights which I think is going to demonstrate a very solid performance over the half year, with our operating profit growing to EUR 54.9 million and our operating margins expanding to 6.1%, and our net debt-to-EBITDA trailing reducing to 1.5x from 3.4x in financial year '22. So Patty will take us through in quite some detail our financial highlights. What I will then demonstrate and take you through is some of the areas of focus for us strategically. As you know, cider is a very, very important part of our business. We set an objective at our Capital Markets Day last May that winning in cider was important for C&C Group. And I will share with you a little bit later how we are winning share in cider, both in Ireland and in the U.K. We also have demonstrated the importance of the premium beer market in the U.K. and Ireland. It's an area -- it's a big market. It's a large profit pool and has been -- it's an area of weakness for C&C but an area of enormous opportunity. And there, I'm going to give you some insight into the early progress that we're making in growing our premium beer business across both islands. On the system strength side, of course, we are the preeminent last mile distribution system in the U.K. and Ireland to the hospitality industry. We are all aware of the challenges that distribution faced as we emerge from COVID. But what we will demonstrate to you is that the service levels of C&C Group are improving and are beginning to return to levels that at least we feel proud of and we feel are market leading in the U.K. and Ireland. Importantly, we look at the quality of the distribution that we sell beer, cider and more broadly, third-party beverages too. And what, again, I will demonstrate in the next couple of slides is that the quality of the customer that we're dealing with is improving and the revenue per customer that we are generating is also improving, growing by 68% versus the same period this time last year. And finally, sustainability is rooted in everything that C&C does. We're extremely proud of our sustainability credentials, and we continue to make enormous progress in sustainability at a brand and business level. And again, I'm going to demonstrate to you a little bit later the progress that we're making on our continuous CO2 reduction, our commitments on carbon, but also on our SNG commitments, our role in society in ensuring that we, as an alcohol producer, continue to act in a very, very responsible way and partner in the community for good in society moving forward. So that is what is going to be the outline of our presentation today. But before we do that, if I can move you on to Slide 4, I would just like to make a couple of comments on, I would say, this -- certainly the volatile markets that we find ourselves in at this moment in time. And following 2 years of COVID, which, of course, was an enormous headwind, we had hoped that we would probably experience a couple of years of tailwinds in the market. And with the recent cost of living crisis, with the difficulties in Ukraine, that has certainly changed. And I think that there are a couple of questions that I'm continuously asked by observers, by people within the industry, even colleagues within our own business and they focus on 3 areas: what's happening with the customer currently, what's happening with the consumer, and given the challenges around distribution, how is distribution progressing? And I'd like to just share a couple of perspectives on that and how it relates to C&C currently, but more importantly, moving forward. And I think what we do see firstly on the customer side that this is, without doubt in hospitality, the most challenging period that they have faced in quite a time. Of course, customers were in those times -- business closed during COVID, nothing can trump your business being closed. But with their businesses reopening, we are certainly seeing the pressure on input costs and the squeezing of margins within the trade, and it's absolutely undeniable. And that's forcing customers to think differently about their business. They're really looking to see how can they deal with rising costs and how can they reverse the declining margins within their business. That may present a challenge for us, but it also presents an opportunity because we see more and more customers that are looking to use their scale to improve their purchasing power. And in that context, C&C as a fully composite offering, we think we can approach many, many customers that are under pressure and offer them a proposition, a more rounded proposition that can help them with their margin and hopefully help the sustainability of their business moving forward. We're also seeing the unwinding of a lot of government support post COVID and a lot of credit pressure in the channel. And again, we as C&C, we have a strong balance sheet and we have a strong history of successful trade financing in the market. And whilst interest rates were low, the appetite of customers to use our facilities maybe weren't as high as they possibly may well be in the future. And Patty is going to take you through the improvement in our balance sheet a little bit later. But it does give us optionality on being able to support customers that we believe are really going to strengthen our position in the market over the next 1, 2, 3 years ahead. And finally, what we see in the channel -- on the customer side is we see that they still continue to have tremendous labor shortage in the market. It is well documented that finding hospitality staff, chefs, waters, waitresses, front-of-house staff is incredibly complicated. And what we see is our customers needing to simplify their business and needing to make their business as efficient as possible. One of the great ways that we can help is by being a one-stop shop to customers. Instead of having 5 or 6 deliveries per week calling to your outlet, we can come with one. That means you're dealing with one invoice, one payment, one delivery, one bit of downtime for staff. And again, we are seeing a growing number of customers who want to engage with us and see how we can help them simplify their business in order to deal with the tremendous labor constraints that we're seeing across the market. On the consumer side, again, it's extremely uncertain at this moment in time. Again, many people ask me, what's the outlook for the consumer? And I'll disappoint you all on the call today because I just don't have that crystal ball and neither does Patty McMahon. But there's no doubt that I think that the consumer is going to feel a squeeze certainly as we move into the winter period and as energy bills begin to land on people's tables at home. The question for us is what we saw post lockdown when consumers return to the on-trade was certainly that high-end spirits, mixed spirits and cocktails did very well as people came back out and celebrated in the on-trade. And one of the questions we are asking is, as consumers' belts tighten, will they look to reengage with categories in alcohol that they may have left post lockdown? And in that context, cider and beer, which is a core part of our business, we think, will recover, and we are well positioned to win in that. There is no doubt that cider was one of the categories as a sweet, refreshing, easy drinking alcohol. It did lose share to cocktails and spirits post lockdown. And one of the questions we have and maybe one of the opportunities we see is consumers drifting down from cocktails and potentially drifting down from spirits back into longer alcoholic strengths where they see a little bit of better value moving forward, a nice opportunity for C&C. We still see the premium beer market in the U.K. and Ireland as being large and an area where we have extremely small share. And again, despite the pressures in the market, we see a growth potential for our portfolios in premium beer in both Ireland and in the U.K. And I think one of the last questions people ask me about is channel switching. Are more and more people moving from the on-trade to the off-trade? I think it's fair to say that post COVID, the winner in the market was the off-trade that there has been a structural shift to more and more consumers consuming alcoholic beverages at home. And in that context, we are expanding our portfolio in the off-trade. We're building our distribution point base for our cider portfolio, for our premium beer portfolio and importantly, for some of our agency brands, particularly in wine, in the off-trade channel. We're also investing in capability in that part of the market and building up the quality and depth of our off-trade channel team where we see opportunities for growth into the future. And finally, in the area of distribution, which again is well documented in the market, it has been an area that has been under tremendous pressure over the last 2 or 3 years. And what I'll show you a little bit later is that our service levels are returning now to above -- are in the region of 90%. We think we are market-leading, and we see that many of our competitors are still struggling to try and deliver type of service levels that we have in the market. And we believe that having an in-house logistics operation is a benefit. We're able to engage with our colleagues very, very closely. We like to think that we look after our colleagues very well. We have a very deep safety culture within our company. We also have worked very closely with our colleagues in making sure that our remuneration is market competitive and fit purpose. And what we're seeing in this sector at this moment in time is some companies, particularly 3PLs that are certainly stressed, if not financially distressed. There's even an expected strike by one of the largest players in the market due to take place next Monday, which would be most disconcerting and discommoding for the market and again possibly an opportunity for C&C. But we are seeing those types of stresses in the market that we haven't seen in the past. And of course, as the market tightens and as our customers in the on-trade, in particular, feel the squeeze and particularly the financial squeeze, your credit and credit risk comes to the fore. And again, I think what you'll see when Patty shares his slides is that the balance sheet of C&C is strong. We are capable of taking credit risk. Of course, no company wants to take a credit risk or a bad debt risk where we have, again, a great history of understanding credit, managing credit very successfully. We did that really well throughout COVID where our bad debt levels were incredibly low, and we feel we are well positioned, very well positioned to navigate some of the challenges that our customers may face over the next 12-, 18-month period. Whatever length periods we find that these challenging consumer and customer circumstances will prevail. So they're just a couple of considerations or observations that I want to share with you. And now I will take you -- hand to Patty who will take us through the financial performance.

Thanks, David. Good morning, everybody. And turning first to Slide 6, a summary of the H1 [ here ], illustrating that solid trading performance that David has referenced. Net revenue at EUR 903 million, was up 36% year-on-year, with H1 being our first unrestricted half since H2 in fiscal '20. Operating [ profit ] of almost EUR 55 million reflects our [ pricing actions ] offset by higher input costs and overheads as well as increased brand investment in the period. Operating profit margins of 6.1% are pleasing within the circumstances and represent significant year-on-year improvement. It's worth noting that [ EUR 9 million ] of increased brand investment is contained within that 6.1%. Free cash flow of 55% -- or of EUR 55 million represents a 68% conversion rate, which is at the top end of our medium-term range. Our net debt position, as David referenced, EUR 180 million post IFRS 16 is really helped by the disposal proceeds from Admiral in the period, and it equates to 1.5x net debt to trailing EBITDA. That's well below our previously stated less than 2x target range. Turning to Slide 7. Now in a closer look at that plus 36% year-on-year growth on net revenue. Distribution revenue growth at 41% overall, really faster than our brands, and that's largely reflective of the on-trade channel and volume recovery and mix point. GB's revenue growth was 37%, a little bit ahead of Ireland's 31%. In Ireland, brand revenue growth was 48%, and that was driven by strong price mix impact. Of that EUR 19 million net revenue growth on the brands in Ireland in the first half, half of that, more than half of it came from the Bulmers brand itself. In GB, brand revenue growth was 20% year-on-year, again, driven by positive price mix impact with tenants representing, again, slightly more than half of that year-on-year growth. But clearly, it's the GB distribution channel that's [ driving ] the largest year-on-year improvement in absolute terms. And that's because it's very much an on-trade channel, and it's benefited from unrestricted trade and higher value per order year-on-year. Turning to Slide 8 now and operating profit of EUR 54.9 million is at the upper end of the range we provided in our [indiscernible] day some weeks ago. I would point out that the composition of our operating profit is different than it was previously. Before COVID, 70% of our profit came from brands, meaning [ 30% ] came from distribution. In this half under review now, we see 55% of our profit coming from distribution. So that's from 30% to 55%. And that switch clearly reflects higher brand investment levels and import cost inflation rounds but pricing actions taken benefit that we've previously announced, cost reduction programs that mostly have favored the distribution channel. And of course, the aforementioned [ higher ] growth rates on [ distribution ] all play into that switching or rebalancing of the profit profile. Ireland's profit overall more than doubled year-on-year to EUR 19 million for the half. In GB, the profit overall was up 400%, and that was entirely driven by the distribution channel. As indicated earlier, brand margins reflect price increases, input production and overhead inflation as well as significantly increased brand investment. I think here most pleasing that in the GB was the distribution channel's operating profit margin percentage of 4%. And that's in line with our medium-term target range. And [ we might ] expect some downward pressure in H2 due to normal seasonality, it does represent another milestone achievement for our business and a new high from cost savings and various operational efficiency programs. That 4%, really, really pleased with.. Again, it demonstrates what that business is capable of doing as we discuss at length I think at the last Capital Markets Day. If we turn on to the next slide, [ Slide 9 ], and cash generation was again strong at 78% free cash flow conversion, the working capital outflow of EUR 1 million contains EUR 16 million of tax deferral payments and modestly higher levels of stock, offset by our data securitization facility. As at the end of August, that data securitization facility was drawn to the value of EUR 110 million, then [ approached ] to EUR 115 million last year and I think notably EUR 180 million pre-COVID. So we've detuned that facility quite significantly over that period. Debt collection continues to be good, as David mentioned, but we're clearly mindful of extending credit risk. And we take some actions even in the last few months to reduce our exposure, and I think we'll continue to do that over the coming months. We have and will continue to invest in network improvements, growth CapEx, technology and, of course, our important ESG commitments. Stated free cash flow conversion range for the medium term, 65% to 75%, and we've delivered at the very [ bend ] of that range here. Turning to Slide 10. Net debt of [ EUR 108 million ], that equates to net debt to trailing EBITDA of 1.5x. This outcome sees us back within traditional lender covenants again, which in turn reduces our cost of debt, which is really pleasing. Our stated target for leverage was less than 2x. And from a year-end position, a few short months ago of 3.4x we've achieved our goal. The first 2 of 3 tranches of Admiral disposal proceeds [ serve to ] improve this number further, as we can see, with the remaining EUR 21 million expected to be received before the end of our fiscal. It is clearly a really good position to be in, and it's a product, I think, of the past 2.5 years of prudent capital allocation decisions. For me, this is a really big highlight for the period end results. And finally for me, turning to Slide 11 now, an update against the Capital Markets Day, capital allocation hierarchy that we talked about. And first and foremost, I think we'd call out brand investment of more than EUR 18 million, representing about 11% of branded net revenue. That's approximately double the investment that we've had over the last few years in percentage terms relative to branded net revenue. So I think we can be really pleased with how we're investing in our business for the medium and long term. We previously said CapEx would be in the range of EUR 15 million to EUR 20 million this year with almost EUR 8 million being invested in H1. Again, that's in favor of growth CapEx primarily and continued ESG investment. We've invested EUR 5.4 million in technology improvements over the last 12 months or so, and that's to allow us to transact on a single ERP platform in GB, and that's expected to go live later this fiscal. Today, we announced our intention in light of our balance sheet strength and the conviction that we have in our business to declare our intention, to declare a full and final year dividend, following our full year results in a few months' time early next year. Lastly, we continue to assess inorganic opportunities that could strengthen our business, and we do that against a strict framework. And now again, having achieved our leverage target as outlined earlier this year in our Capital Markets Day. So thank you. I'll hand you back to David.

Thank you, Patty. I will now take you onto a quick overview of our brand performance, and I reference you to Slide #13. Patty has said that we have been investing behind our brands, investing quite significantly. And I'm pleased to share the performance insider on both the Bulmers brand, the Magners brand and Orchard Pig in the U.K. Many of you will be aware that our business in Ireland had been under pressure with Bulmers losing share for many, many years. Following the implementation of a comprehensive marketing program over the last 9, 12 months, we've seen a significant turnaround in the performance of the Bulmers brand from a share point of view. And we're growing market share in both the off-trade. And in the on-trade, almost 65% of the market now in terms of share is the Bulmers brand. And we're not finished. We see further share growth potential for Bulmers, especially on draft in the on-trade in the Irish market over the next number of months and the years. So encouraging turnaround in the performance of the Bulmers brand in Ireland and a key profit sale for our business. In addition, in the U.K., with the combination of Magners and Orchard Pig, Magners is a well-established brand with just over [ 6 ] share, again, we're beginning to see some signs of recovery with Magners where we work together with our partners, BBG in the U.K., most notably in the off-trade. We've also been successfully seeding our premium craft cider brand, Orchard Pig, in the market with a strong focus on the on-trade. And there, we're seeing 16% growth year-to-date. Whilst that performance gives us confidence that there is further potential to build distribution and to build rate of sale for Orchard Pig with a strong focus in the on-trade, we're laterally moving to the off-trade as the brand begins to build awareness with consumers in the market. So certainly, one of our first strategic priorities, winning in cider making gains. If I take you to grow premium beer on Slide 14. Again, in Ireland, we've been seeding the San Miguel brand and the Five Lamps brand in premium beer in the market, growing our distribution base by 49%, albeit off a small base in the Republic of Ireland. But also, what's encouraging is that the rate of sale for both of those brands is growing by 82%. And that gives me confidence that we have the capability and the brands and the access to market to continue to build our premium beer business in Ireland, where we have a very, very, very small share. A similar situation is being replicated in the U.K., and we're building out of our probably stronger position in premium beer in Scotland with the Heverlee and Menabrea brands. But we are starting out to build distribution south of the border for both of those brands growing our distribution base by 42% in -- versus the same period last year. And for a brand like Menabrea, we're growing our volumes by 20%, so again, strong momentum. And some people would have asked the question, is the Italian beer market cluttered? Can we find space in that competitive market? But again, what we are seeing is that we are able to land this brand into the right outlets and gain real traction with customers and consumers moving forward. So again, very early days since we last talked at the Capital Markets Day, but both in the U.K. and in Ireland in the area of premium beer, our brands showing some initial signs of growth that gives us confidence and optimism in terms of our capability to grow our position in premium beer moving forward. Our third pillar, which is growing our agency and equity brands on Slide 15. Again, what you see there, our agency and equity brands are about 7% of our total revenue. And these brands are growing their revenue at 34%. It's a diverse portfolio I've just illustrated a few examples here, but we recently took on the distribution for Moet Hennessy in Scotland as the exclusive route to market in the on-trade. In Ireland, we have a brand like Corona, which we're now beginning to roll out on draft. That's something that we're very excited by. The premium draft lager market in Ireland is an attractive profit pool where again, we have a very small position. But I'd also call out a little brand, I call it JUBEL, where we have an equity stake that we've built over the last couple of years. It's an unusual brand in that it's a peach flavored beer. It's ultra-premium with pricing similar to that of craft beer in the market. And again, we're seeing a franchise amongst younger consumers, both male and female, in the on-trade and in the off-trade. And we're seeing, again, off a very small base quite dramatic growth for a brand like that. So again, what I would like to call out is the ability of us to use our distribution footprint to grow partner brands, agency brands, our brands where we have an equity stake in them at this moment in time. Moving on to Slide 16. What you will see here is that our revenue per customer is increasing by 68%. You will recall in the Capital Markets Day that we have a strategic focus on growing our share of customer. We are really focused on understanding how can we expand the number of categories of beverages that we sell to existing customers. And that, I think you see starting to come through now in the growth there. What we also now track is of all of the outlets that we call to, what share of our outlets sells a C&C brand? And again, you'll see that that's grown to 51% of our customer base from 45% at the same period last year. So our commercial operations are really beginning to place greater emphasis on our own brands in the customer base that we have in both the U.K. and in Ireland. On the right-hand side of that chart, you see that our service levels are improving. They've returned now to almost 90%. It's still not where we want to be. I mean we have an ambition to get back above 95%, 96% service levels and were somewhat hampered by inbound deliveries by our largest suppliers. Their service into us still isn't at the level that we would expect and we're working hard with those suppliers to see how we can improve that because ultimately, that is the key to us unlocking a higher level of service with our own customers in both the GB and Ireland moving forward. Finally, we have to continue to win new customers, and I've just pulled out a couple of recent wins in the market over the last 6 months. RedCat is a new pub company. I think they have more than 100 pubs with a very, very aggressive plan to grow in the U.K. And we have won all of their business, including the distribution of some of our brands. Wells & Company is a large pub company in the Southeast of England about 160 pubs. And again, there, we have won business and again, a lot of distribution of our own brands. And with businesses like Boparan, some of you would be familiar with some consumer brands like Carluccios. There, we have won the entire distribution of that, and we've been successful in replacing Peroni with Menabrea as the exclusive Italian lager brand within that business. Similarly, the same thing has happened with the Gusto chain. Again, a very nice gastro chain in the U.K. growing quite quickly, where again, Menabrea and Orchard Pig are now the favored brands in Italian beer and in premium cider within that chain. And we've also recently won the Etihad Stadium, the home of Manchester City. Again, a great high-profile win for us in the Manchester area, which again will give us the opportunity to build the profile of our brands moving forward. So again, a lot of focus on building our customer base, improving the quality of business we're doing with our existing customers and continuing that focus of delivering a best-in-class service levels to our customers moving forward. If I then take you to sustainability, incredibly important to our business and even in the last half, again, a lot of progress we made, we will deliver on our 4% CO2 reduction target this year, taking out 1,500 tonnes of CO2 from our business. The biggest couple of initiatives that went live in the last half was our solar panel farm in our cidery and Clonmel went live during the half. It's the largest rooftop solar panel farm in Ireland. It's delivering between 10% and 15% of our energy requirement, closer to 15% in the summer. But again, it's making a very positive contribution to our CO2 reduction but also, from an efficiency point of view, makes a big contribution to the energy bill within C&C. On the social side, we're working very hard internally with our colleagues. We've -- we're going to train -- we had somewhere in the region of 50 mental health champions in our company. We're going to train another 100. We know that our colleagues are under pressure. We know that physical and mental well-being is a real priority within our business, and we want to make mental health champions within arm's reach of all colleagues across our business moving forward. We measure our climate within our company and through an engagement survey. And again, we've seen in the last half, continuous improvement in that. We will go and do our next dip in our colleague workforce in November. And again, we hope to see continuous improvement and commitment of colleagues to working within C&C moving forward. And on the governance side, again, as an alcohol producer, we recognize that alcohol is a force for good in society. And when consumed responsibly, alcoholic beverages are a fantastic thing that bring joy to lives. But we do recognize from time to time that some consumers have a difficult relationship with alcohol. And there are charities and associations that are at the call phase, helping those consumers bring some quality back into their lives. From our point of view, we want to support those, and we've just announced a major initiative with The Big Issue that are going to become one of our true charity partners in GB. And we want to help The Big Issue build its brand, fund its business and continue to grow the positive impact that it can make with some of the more disadvantaged in society moving forward. So it's a partnership in C&C that we're very, very excited by. And of course, on the governance side, we're collaborating very closely at this moment in time with the Scottish government and Circularity Scotland in the planning for the implementation of deposit return schemes in that market moving forward. Finally, we know that sustainability is incredibly important to our consumers, especially young consumers. They're passionate about the planet, and they're passionate about brands that are genuinely committed to sustainability. The story of sustainability on our cider brands, Bulmers and Magners, is unrivaled. And I think what you will see on this slide is just some examples of how we're now integrating our sustainability story into the brand messaging around the Bulmers brand and the Magners brand. And we're pretty convinced that, that genuine commitment to bringing a brand to the market that lives off sustainability, that comes from a cidery in Clonmel that's virtually carbon neutral that, that will resonate with consumers and continue to help us grow our Bulmers brand in a sustainable way, both in Ireland and in the U.K. moving forward. So finally, if I try and summarize where we are before we open up to Q&A. I think what you've seen is that we've had a strong trading recovery. And as Patty has shown, the balance sheet of the company has strengthened tremendously. And I think all would acknowledge that our disposal of our stake in Admiral at the time that we did was a very, very good piece of business. Again, I think what Patty has shown is that we have delivered -- we say delivering, but we've delivered in the short term on our distribution margin targets, which are -- that 4% target, which, again, we're delighted by. And also that debt leverage at 1.5x. I think in these times where the market is more challenged, where the environment is likely to be difficult, having a slightly more conservatively geared company can only be a good thing for our business. I think what you see since our Capital Markets Day, and it's not that long ago, but I think you will get a sense that we are progressing our strategy. It's early days, but on cider, on winning in premium beer, on growing our agency brands and on continuing to build our system, our distribution, system across all elements in the face of quite significant headwinds, we're continuing to make progress. In delivering our numbers, we -- there is no doubt that we are facing input cost pressure, but we've also been pretty successful in delivering price increases to the market. We've just gone live with our latest round of price increases in GB this month. And again, I think we've found a way of balancing both across our branded business and our distribution business, our ability to recover the input cost pressure that we're undoubtedly experiencing and will continue to experience for the months and possibly years ahead. It's a volatile time. What we've seen in September is that our revenue was down about 5%. We're definitely seeing that the monthly results are bouncing around in a way that I haven't experienced in quite a long time. But equally, we see opportunities ahead, November and December are critical trading periods for C&C Group. The December month is the biggest month in the year, and we have what we hope will be a more normal Christmas this year for the first time in 3 years. And we will see what the impact of the World Cup will be in terms of bringing consumers out into hospitality. Of course, most notably in England, where if the English team were to do well, there's no doubt that, that will have a positive impact on our business. And as Patty finally said, we will -- it is our intention to recommence with the dividend, and I would read that as a sign of confidence in our business. We don't make the decision of reintroducing a dividend lightly. It's not a 1-year decision. You look on that as something that you want to reintroduce for many years to come. And we've considered that carefully. The Board has considered it carefully. And that is something that we will do at the end of this fiscal, which again, I think gives some sense of the confidence that we have in the C&C business despite the continued headwinds that we face following 2 difficult COVID years and as I said, a cost of living challenge that will probably be with us for the next 12, 18, 24 months. I will wrap up from my side. And now I'd like to open up the floor to questions. Thank you.

[Operator Instructions] Our first question comes from Patrick Higgins of Goodbody.

A couple of questions from me, if you don't mind. So firstly, just on [ spend ] clearly, a significant uplift during the period, which I think keeping to what you said in the CMD, but I was perhaps expecting a more gradual uplift here. Could you just give us an idea how we should think about that level of spending going forward? Should we expect to retrench a little bit? Or is this the new base? And digging into that, [ could you give us ] where the marketing spend in GB was focused? And I appreciate we've seen improvement in Magners' performance since period end, but I know that lost some share during the H1 period despite that take-up in marketing. So maybe just digging into that and why perhaps the increased marketing in GB wasn't as effective as it was with Ireland and Bulmers. Second -- kind of third question, I guess, is just on H2, clearly, some potential benefits around the World Cup and a normal Christmas trading period. How are your conversations with customers going on these potential benefits? Is there, I guess, a lot of optimism? Or how is it being, I guess, balanced against the challenging macro backdrop?

Okay. Thank you, Patrick. A couple of things. I think the first thing to say is that building brands takes time. And sometimes, I think on these calls, people expect that you start today and you see the results immediately. This is something that we're committed to and we're committed to for the long haul. And the reason we are is we see such tremendous profit pools that we can attack where we're generating no revenue for our business today. So that's the first thing. I think the second thing I would say is having that level of DBM in our P&L, the quality of our P&L is improving tremendously. And there's a lovely saying that I learned from my mother, Patrick, which is it's better to be looking at it than looking for it. And we are reengineering the P&L now where we have the firepower to go and build brands in the business moving forward. We are -- you're right to point out, in Ireland, we are in real control of the Bulmers brand. I mean, we market, sell and distribute the brand. So there, I think it's utterly seamless. And we've seen, as I said, the response to what I would consider a normalized level of marketing investment behind a pillar brand in the market. I mean Bulmers is, together with Guinness, probably the 2 most top brands in the Irish market. And again, as I said, we're seeing the response to the brand there. Of course, in the U.K., Magners, which has been under pressure for many years is more difficult because we partner with BBG. And they do the selling and marketing and distribution of our brand, especially in the off-trade. I think that we're really understanding where the brand is doing well, where it's struggling. We see in particular that the brand is doing well in grocery. But in the convenience channel, it's under fair share. So we have somewhere in the region of [ 8 ] share in grocery. We have about [ 3 ] share in convenience. So we understand where we need to grow, and we're aligned with our partner there, that that's where we have to focus moving forward. In the on-trades, we're beginning to do the job ourselves through our old Matthew Clark Bibendum operation. So there, we are building managers, but we're also quite excited about the early signs on Orchard Pig. And I think we realized that having a British cider, a premium British cider in Britain is also very important. The cider category, the cider ritual in Britain is very rich. From the Southwest of England, there is a loyal following of consumers for local ciders, and we think with the Orchard Pig, we can play an important role there. So I would say, broadly, we're comfortable. We're spending quite a bit of our money on brands, what we call seeds for growth, seeds for the future. That's Menabrea, Heverlee, which are our premium beer brands and rolling out distribution in England and Wales, supporting visibility in terms of taps, counter mounts, glassware and in-outlet visibility has been our focus. As we [indiscernible] the level of distribution, we will then start to increase our investment behind an above-the-line marketing, probably with a significant emphasis on digital communication, that will be the direction of travel. I think having the higher level of DBM within the P&L, Patrick, always gives us the opportunity to manage the DBM spend level. Like any sensible business, we will ring-fence some marketing towards the back half of the year or the back quarter. And as I said, it will always give us some flexibility. But our ambition is to invest. Our ambition is to invest. That's somewhere in the region of 10% of branded NSV. And we've probably got there a little bit more quickly than we had planned. On customers and trading, I think what we're seeing is in terms of Christmas bookings probably the biggest trend is Christmas bookings are coming through. I think what we're seeing is that pubs are doing well. Parties are looking like they will be in smaller groups. It's not clear yet what the level of walk-ins will be, but the nervousness would be on the large company party. I think that outlets that were expecting to do that type of business are probably a little bit nervous at this moment in time. Outlets that can handle the 4s, 6s, 8s, 10s, 12s, that type of grouping are feeling a little bit more confident about what's happening. A little uncertainty that customers have is if England is doing well in the World Cup, and that's coinciding with nights where parties were scheduled, how will that all work? Now probably [ a good problem ] because that means pubs are very busy, but that's one of the things that people are trying to get their heads around.

We now move on to our next questioner, which is Laurence Whyatt of Barclays. .

A couple for me, if that's okay. Two optimistic ones, I think. If potentially going into a scenario where we're seeing some COGS headwinds starting to roll over, things like natural gas prices are coming down, aluminum has been coming down since around April time. And there's the possibility that COGS start to become cheaper into next year. Do you think that's an opportunity for your margin? How are your hedges going into 2023? Or do you see other COGS headwinds, perhaps things like wage inflation and other inflation that could potentially be a headwind and offset some of the benefits from things like lower energy prices and lower aluminum prices? And then secondly, for Patty. Your leverage clearly now well below your 2x target. I appreciate the times are fairly uncertain. But given that there's some lower M&A multiples coming through given the interest rate rises, what would you see as a potential use for your cash? Would you like to keep it at the sort of 1.5x or even get lower? Or would you be more comfortable with that net debt figure moving up towards that 2x figure?

Maybe look, I'll take the second one first, actually. I think 1.5x we're delighted with, right? And we've made massive progress since year-end, where we were at 3.4x. So I think we're delighted with progress, but we're very cautious about maintaining at that sort of level. It's only this -- it's only today that we're properly back within -- or outside of covenant waver territory. So I think 1.5x is the height probably of where we're comfortable with leverage. I think in H2, we'll run at a little bit lower and be a little bit more conservative. Again, you referenced M&A, I think we want to keep that optionality available to us. We've talked about reinvesting in our own capabilities. And I think the more opportunity we have to do that, the better. So I think 1.5x is probably a ceiling as I would see it right now, Laurence. I think the first question you've got about cost, some of the costs are coming off a little bit on gas and aluminum in particular, absolutely. You're right. But look, we remain cautious. There are other baskets that are going the other way. I'm thinking about glucose. I'm thinking about malt and barley, for example. And we've seen some significant increases on those items. Of course, there are items as well that we can't hedge against. But where we have or where we do have the ability to hedge out to FY '24. We have taken that largely. And at the moment, just north of 80% of our hedgeable import costs for FY '24 have been hedged. We think we're better than the market or better than the spot rates by about EUR 10 million. So that's a positive right now. But look, we're not complacent about it. We're not going to hope that there's further softening in import prices. If there is, that's great, and you're right, that would be positive for our margins. But that's not our working assumption. Our working assumption is that it's going to remain tough, albeit some elements of our cost base might soften, but other areas we're not being complacent with. And that's very much informing our pricing strategy and our pricing actions. And we've been active as recently as this month, with further price increases, and I think that there will be more to come on that front. So I think -- yes, I think we remain of a mind that it's going to be a tough inflationary backdrop, and we're acting accordingly.

And perhaps just to follow up on the M&A front. If you were to find anything, what sort of thing would you be looking for? Is that more incremental brands? Or are there any gaps in your portfolio that you'd like to fill? Or are there any other parts of the business that you would look to do to expand?

No. I think, Laurence, I mean that we ask 1 of 2 questions. I mean we have a business that's built on brand strength and system strength. And any acquisition has to reinforce 1 of those 2 things. Would a brand help us grow more quickly or a portfolio of brands? Or equally does something in the distribution space, in the B2B space, the B2C space, would that improve our distribution system and allow us to win more customers, more share of the customer more aggressively moving forward? So I think we will always look at this through that lens. I think that we are very much U.K. and Ireland-centric as well. I think that's important to say that we have refocused the business in the last 18 months, particularly with our divestment in the U.S. And we still have a nice export business with Magners and to a lesser extent, with tenants, but we've refocused on U.K., Ireland in beverages, cider, premium beer agency and anything that can help us in that space, we think, is something that we should look at quite closely. Quite often when people say the opportunity dictates the strategy. You then want to buy lots of things or look at lots of things. But if they're not for sale or they're too expensive, we're not going to embark on that. But in these uncertain times, you just don't know what may come available for sale. I think that it's highly likely that there will be some new opportunities will emerge, I think, in the next 12, 18 months.